Pension drawdown risks in the spotlight after another painful day on the markets

9th February 2016

Investors have been counting their losses after another tough day on the markets, which has particularly underscored the risks for pensioners in drawdown plans. Yesterday the FTSE 100 fell by over 2.5% to close at 5,689 and European markets also fell sharply.

Bruce Moss, strategy director at eValue, says: “Our research shows that global volatility affects consumer pension preferences. Following volatile markets in August and September last year, preference for guaranteed income rose to a high of 47%, up from just 33% when pension freedoms were introduced. Meanwhile, preference for flexible income plummeted from 54% in April 2015 to a low of 42%.

“Today, at a time of market volatility with equities trending lower, the risks for retirees using drawdown are considerable. This is especially true if they are in the early years of retirement since their wealth could be eroded rapidly unless they reduce their income. This week, we would expect to see another spike in preference for guaranteed income as global uncertainty drives consumers to seek out the safe haven of annuities. ”

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “Monday was as grisly on the markets as it was on the rain drenched streets of the UK. Markets are clearly worried about a global economic downturn at a time when central banks have little dry powder left to fight off recessionary forces. The tables were turned in the UK stock market today with recent winners suffering from profit-taking, while the miners were virtually the only stocks to keep their heads above water.

“The collapse in the oil price has been a big shock to the financial system and its effects are still being absorbed by international stock markets, in particular the implications for global demand. Financials have been really badly hit of late, and in a sign of how dire things have got, some European banks are trading lower than they did during the depths of the financial crisis. There doesn’t seem to be much justification for such a dismal outlook, but markets appear to be stuck in a negative feedback loop at the moment.

“If you listen really hard, you can hear some reasons to be positive. Ironically cheaper oil is one; this is a huge boost to the coffers of oil consumers across the globe who will find more money in their pockets to spend on other goods and services. Likewise the continued strength of the US economy and low interest rates across the developed world should bode well for stock markets, but for the time being these factors are being totally drowned out by negative sentiment.”

Rohan Sivajoti, advisory services director at eVestor, adds: “Now is not the time for investors to take knee-jerk decisions with their financial futures. Investing is a long-term commitment and it’s important not to panic sell when markets are volatile.

“The FTSE 100’s recent falls have been driven by investors’ deep concern over the stability and strength of the global economy and the knock on effect this might have in the UK. During a period of falling inflation and low wages, the UK could find itself at particular risk of catching the economic epidemic that is spreading across the eurozone. It yet again highlights the importance of focusing on what you can control, such as costs and portfolio diversification, while remaining invested for the medium to long term.”